Trading on margin is not commonly done in stock trading except by professional investors and institutional traders. However, trading on margin is standard practice in the futures markets and forex trading. The ability to trade on a relatively low margin, with high leverage, is part of what attracts many speculators to futures and forex trading.

Trading on Margin

In trading stocks on margin – most common in short selling – the maximum margin allowed is usually 50%. The remaining half of the stock price is provided by a loan from a broker. In futures and forex trading the margin requirements are much lower – as low as 1% to 5% of the traded contract value – and the margin posted by a trader represents a good faith deposit. This affords the trader a high level of leverage to greatly amplify the effect of price changes in terms of the dollar amount of gain or loss in the trader's account.

If the market moves in the trader's favor, this leverage enables the trader to realize significant profits on even small price changes. However, if the market moves against the trader's position, just a moderate price shift amplified by the leverage used can lead to losses greater than the trader's margin deposit.

Initial Margin Requirements

The initial margin requirement is the amount a trader must deposit to initiate a trading position. Once a trading position is established, a trader must maintain a certain balance, typically 50-75% of the initial margin, to continue holding the position.

Maintenance Margin

If the account falls below this specified maintenance margin level, then the broker sends the trader a margin call, informing the trader that they must immediately deposit sufficient funds to bring the account back up to the initial margin level. If the trader fails to do so promptly, the broker will close out the trader's market position.

For example, if the initial margin requirement for trading one gold futures contract is $1,000 and the maintenance margin requirement is $750, then if the balance in the trader's account drops to $725, the trader must deposit an additional $25 to bring the account back to the original initial margin level.

  1. What does a futures contract cost?

    Learn about values of futures contracts and the initial margin a trader must place in an account to open a futures position, ... Read Answer >>
  2. What is a margin account?

    A margin account is an account offered by brokerage firms that allows investors to borrow money to buy securities. Read Answer >>
  3. Profit margin versus operating margin: What's the difference?

    There are some distinctions between profit margin and operating margin. Both measure efficiency of a firm, but one takes ... Read Answer >>
  4. What Does a Share Liquidation in My Account Mean?

    A liquidation occurs when an account's holdings are sold off by the firm where the account was held. Read Answer >>
  5. How is marginal revenue related to the marginal cost of production?

    Learn about the marginal cost of production and marginal revenue and how the two measures are used together to determine ... Read Answer >>
Related Articles
  1. Trading

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  2. Trading

    A Guide to Day Trading on Margin

    Buying on margin is a good option if you don't have the cash to day trade.
  3. Investing

    Spreading The Word About Portfolio Margin

    An underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
  4. Trading

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
  5. Trading

    The Advantages of SPAN Margin

    Find out how SPAN margin gives option strategists more bang for their buck.
  6. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  1. Marginable

    Marginable securities trade on margin through a brokerage or ...
  2. Margin Call

    A margin call is a broker's demand of an investor who is using ...
  3. Excess Margin Deposit

    An excess margin deposit is cash or equity in a margin trading ...
  4. Margin

    Margin is borrowed money that is used to purchase securities. ...
  5. Option Margin

    Option margin is the cash or securities an investor must deposit ...
  6. House Excess

    House excess is used by brokers to describe the amount of cash ...
Trading Center